Merger and Acquisition

Presented By:
Nidhi Goswami
Prashant Sharma
Sunidhi Rathee
Viprendra Vikram
 DEFINITION

The phrase mergers and acquisitions refers to the aspect of

corporate strategy, corporate finance and management dealing
with the buying, selling and combining of different companies
that can aid, finance, or help a growing company in a given
industry grow rapidly without having to create another
business entity.
 MEANING
Merger
• A transaction where two firms agree to integrate their
operations on a relatively co-equal basis because they have
resources and capabilities that together may create a stronger
competitive advantage.

• The combining of two or more companies, generally by

offering the stockholders of one company securities in the
acquiring company in exchange for the surrender of their
stock
Contd…
ACQUISITION
 “A purchase of a company or a part of it so that the acquired
company is completely absorbed by the acquiring company
and thereby no longer exists as a business entity".
 It also known as a takeover or a buyout
 It is the buying of one company by another.
 In acquisition two companies are combine together to form a
new company altogether.
DIFFERENCE BETWEEN MERGER AND
ACQUISITION:
MERGER ACQUISITION
i. Merging of two organization in to i. Buying one organization by
one. another.
ii. It is the mutual decision. ii. It can be friendly takeover or
iii. Merger is expensive than hostile takeover.
acquisition (higher legal cost). iii. Acquisition is less expensive than
iv. Through merger shareholders can merger.
increase their net worth. iv. Buyers cannot raise their enough
v. It is time consuming and the capital.
company has to maintain so much v. It is faster and easier transaction.
legal issues.
vi. The acquirer does not experience
vi. Dilution of ownership occurs in the dilution of ownership.
merger.
TYPES of Merger
1. Horizontal
• A merger in which two firms in the same industry combine.
• Often in an attempt to achieve economies of scale and/or scope.
2. Vertical
• A merger in which one firm acquires a supplier or another firm that is closer to its
existing customers.
• Often in an attempt to control supply or distribution channels.
3. Conglomerate
• A merger in which two firms in unrelated businesses combine.
• Purpose is often to ‘diversify’ the company by combining uncorrelated assets and
income streams
4. Cross-border (International) M&As
• A merger or acquisition involving two foreign firms.
Conglomerate merger types
• Product extension conglomerate mergers involve
firms that sell non-competing products use related
marketing channels of production processes.
• Market extension conglomerate mergers join together
firms that sell competing products in separate
geographic markets.
• A pure conglomerate merger unites firms that have
no obvious relationship of any kind.
Types Of Acquisitions

Two types

 Hostile

 Friendly
Merger as a capital budget decision:-

 Capital Budget: (or investment appraisal) is

the planning process used to determine
whether an organization’s long term
investments such as new machinery,
replacement machinery, new plants, new
products, and research development projects
are worth pursuing. It is budget for major
capital, or investment, expenditures.
Framework for evaluating acquisition

 It consist of the following steps:-

 Step 1 – Determine CF (X), the equity related post-tax cash flows of the acquiring
firm, X, without the merger, over the relevant planning horizon period.
 Step 2 – Determine PV (X), the present value of CF (X) by applying a suitable
discount rate,
 Step 3 – Determine CF (X’), the equity-related post cash flows of the combined
firm X’ which consists of the acquiring firm X and the acquired firm Y over the
planning horizon. These cash flows must reflect the post merger benefits.
 Step 4 – Determine PV (X’), the present value of CF (X’)
 Step 5 – Determine the ownership position (OP) of the shareholders of firm X in
the combined firm X’, with the help of the following formula – 
 OP = Nx/[Nx + ER (Ny)] 
Contd…
 Where –
 Nx = number of outstanding equity shares of firm X (the acquiring firm) before the
merger.
 Ny = number of outstanding equity shares of firm Y (the acquired firm) before the
merger.
 ER = exchange ratio representing the number of shares of firm X exchanged for
every share of firm Y.
 Step 6 – Calculate NPV of the merger proposal from the point of view of X as
follows –
 NPV (X) = OP [PV (X’)] – PV (X) 
 Where –
 NPV (X) = NPV of the merger proposal from the point of view of shareholders of X
 OP = ownership position of the shareholder of firm X
Contd…
 PV (X’) = PV of the cash flows of the combined firm X’.
 PV (X) = PV of the cash flows of firm X, before the merger. 
 Example :-
 Consider the firm X limited.
 Step 1- Estimated equity related post tax cash flow CF (X) t of X limited are as
follows-  

           
Year 1 2 3 4 5
CF(X)t 200 220 236 248 260
Contd…
 After five years, CF (X) t will grow at a compound rate of 5% per annum.
 Step 2 – Determination of PV of cash flows using the discount rate of 15%

 PV (X) = 200/1.15 + 220/(1.15)2 + 236/(1.15)3 +248/(1.15)4 +260/(1.15)5 

+260(1.05) /[(0.15 –0.05)(1.15)5] = 2123.79
 The last item in the above equation represents the PV of the perpetual stream of
cash flows beyond the fifth year.
 Step 3 – Estimation of the equity – related cash flows of the combined firm X’ is
as follows – 
Year 1 2 3 4 5

CF(X’)t 320 360 410 430 450

Contd…
 After 5 years cash flows of the combined firm is expected to grow at the
compounded rate of 6% per year.
 Step 4 – Determination of PV of expected cash flows of the combined firm.

 PV(X’) = 320/1.15 + 360/(1.15)2 + 410/(1.15)3 + 430/(1.15)4 + 

450/(1.15)5 +450(1.06) /[(0.15 –0.06)(1.15)5] = 3660.6

 Step 5 – Determining the ownership position of the shareholders of X. the number

of outstanding shares of firm X before merger are 100. The number of outstanding
shares 
of firm Y are 100. The proposed exchange ratio (ER) is 0.6. The ownership
position 
of the shareholders of firm X in the combined firm X’ will be –
 OP = 100 / [100 + 0.6(100)] = 0.625
Contd…
 Step 6 – Calculation of NPV of the merger
proposal from the point of view of 
shareholders X  -
 NPV (X)  = (0.625) 3660.6 - 2123.79 = 164.085 .
 Benefits of M&A
 Staff reduction.
 Economies of scale.
 Acquiring new technology.
 Improved market reach and industry visibility.
 Tax gains.
 Good for companies in their tough time.
 Cost Efficiency.
TERMINOLOGIES
 Due – Diligence

 Leverage Buy out

 Management Buy out

 Poison Pills
Due - Diligence
 "Due diligence" is a term used for a number of concepts
involving either an investigation of a business or person prior
to signing a contract, or an act with a certain standard of care
 It can be a legal obligation, but the term commonly applies to
voluntary investigations
 The term "due diligence" first came into common use as a
result of the United States' Securities Act of 1933
 This Act included a defense at Sec. 11, referred to as the "Due
Diligence" defense
Contd…
 could be used by broker-dealers when accused of inadequate
disclosure to investors of material information with respect to
the purchase of securities
 Originally the term was limited to public offerings of equity
investments.
 It has come to be associated with investigations of private
mergers and acquisitions as well
 The process of due diligence is carried out by a team whose
members have expertise in various functional areas.
Contd…
 Due diligence process is accomplished in four
steps
1. Identification Phase
2. Analysis
3. Summarizing
4. Consolidation
Leveraged Buy – Out
 The acquisition of another company using a significant
amount of borrowed money (bonds or loans) to meet the cost
of acquisition.
 Often, the assets of the company being acquired are used as
collateral for the loans in addition to the assets of
the acquiring company.
 The purpose of leveraged buyouts is to allow companies to
make large acquisitions without having to commit a lot of
capital.
MANAGEMENT BUY - OUT
 It is a special case of a leveraged acquisition

 occurs when a company's managers buy or acquire a large part

of the company.

 The goal of an MBO may be to strengthen the managers'

interest in the success of the company.
POISON PILL
 A poison pill is an attempt to discourage an acquisition by
making it more expensive to acquire a company, or by reducing
the value of the acquired business.
 Poison pills are largely designed to protect directors, and are
harmful to shareholders.
 Poison pills does not allow the shareholder to sell to an acquirer
(usually at a significant premium to the price without bid
interest).
 Poison pill strategies are defensive tactics that allow companies
to thwart hostile takeover bids from other companies.
TYPES OF POISON PILL
STRATEGIES
 “FLIP-OVER” RIGHTS PLAN

 "FLIP-IN" RIGHTS PLAN

 POISON DEBT

 "PUT RIGHTS" PLAN

 VOTING POISON PILL PLAN

Purpose
From the managers' point of view may be :-
 to save their jobs either if the business has been
scheduled for closure or if an outside purchaser
would bring in its own management team.
 They may also want to maximize the financial
benefits they receive from the success they bring to
the company by taking the profits for themselves